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Personal Finance, 4e (Madura)Chapter 2 Planning with Personal Financial Statements

2.1 Personal Cash Flow Statement

True or False

1) For most people, the first obstacle is to correctly assess their true net income. Answer: FALSEDiff: 2 Page Ref: 24Question Status: Existing/Old

2) Salary or wages are the only cash inflows for working people.Answer: FALSEDiff: 1 Page Ref: 25Question Status: Existing/Old

3) Cash outflows represent your liabilities such as the pay-off on your car or home.Answer: FALSEDiff: 3 Page Ref: 25Question Status: Existing/Old

4) Net cash flows are the difference between cash inflows and cash outflows and can be either positive or negative.Answer: TRUEDiff: 1 Page Ref: 27Question Status: Existing/Old

Multiple Choice

1) The personal cash flow statement measuresA) the rate of cash flow.B) cash outflows only.C) cash inflows and outflows.D) cash inflows only.Answer: CDiff: 2 Page Ref: 25Question Status: Existing/Old

2) The cash flow statement reports a person's or family'sA) net worth.B) current income and payments.C) plan for borrowing.D) value of investments.Answer: BDiff: 1 Page Ref: 25Question Status: Existing/Old

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3) Creating a cash flow statement requires that you determineA) assets.B) liabilities.C) cash used for expenses.D) market value of investments.Answer: CDiff: 2 Page Ref: 25Question Status: Existing/Old

4) Which of the following is not a cash inflow?A) Interest receivedB) Dividend incomeC) Car paymentD) SalaryAnswer: CDiff: 1 Page Ref: 25Question Status: Existing/Old

5) Jim has $1,000 income from his job and $200 stock dividend income this month. This month Jim has rent and utilities of $300 and he spent $300 on groceries and $200 on clothing. What is his cash inflow this month?A) $1,200B) $400C) $600D) $500Answer: ADiff: 2 Page Ref: 25Question Status: Existing/Old

6) Cash outflows are also calledA) assets.B) expenses.C) income.D) liabilities.Answer: BDiff: 1 Page Ref: 25Question Status: Existing/Old

7) Which of the following is not a cash outflow?A) SalaryB) RentC) Telephone billD) Car paymentAnswer: ADiff: 1 Page Ref: 25-26Question Status: Existing/Old

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8) Jeff has a $1,000 salary and a $100 dividend income this month. This month Jim has rent and utilities of $300 and he spent $200 on groceries and $100 on clothing. What is his net cash flow this month?A) $400B) $600C) $500D) $1,100Answer: CDiff: 2 Page Ref: 26Question Status: Existing/Old

Short Answer

1) If you prepare a document that shows your cash inflows and cash outflows it is called a(n) ________.Answer: personal cash flow statementPage Ref: 25Question Status: Existing/Old

Matching

Match the following:A) measures cash inflows and outflowsB) summary of assets, liabilities, and net worthC) property and landD) the difference between cash inflows and outflowsE) items owned by a household such as a home or car

1) cash flow statementQuestion Status: Existing/Old

2) household assetsQuestion Status: Existing/Old

3) balance sheetQuestion Status: Existing/Old

4) net cash flowsQuestion Status: Existing/Old

5) real estateQuestion Status: Existing/Old

Answers: 1) A 2) E 3) B 4) D 5) C

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2.2 Factors That Affect Cash Flows

True or False

1) Cash inflows tend to be higher for younger individuals and lower for individuals in their 50s.Answer: FALSEDiff: 1 Page Ref: 27Question Status: Existing/Old

2) Individuals who switch from a low-demand industry to a high-demand industry usually earn higher incomes.Answer: TRUEDiff: 1 Page Ref: 27Question Status: Existing/Old

3) During the final stage in the life cycle, retirement, people experience higher incomes from their demanding careers.Answer: FALSEDiff: 1 Page Ref: 27Question Status: Existing/Old

4) Some people with large incomes spend their entire paychecks within a few days, while others with small incomes may be big savers.Answer: TRUEDiff: 2 Page Ref: 28Question Status: Existing/Old

Multiple Choice

1) Which cash inflow will probably be discontinued after retirement?A) Dividend and interest received from investmentsB) Pension paymentsC) SalaryD) Social Security benefitsAnswer: CDiff: 1 Page Ref: 27Question Status: Existing/Old

2) Which of the following usually affects cash inflows the most?A) The education and income of your parentsB) Your job skillsC) Your personal consumption behaviorD) The size of your familyAnswer: BDiff: 2 Page Ref: 27Question Status: Existing/Old

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3) Cash inflows tend to be the highest in which of the following?A) CollegeB) RetirementC) 20 years into a careerD) First job out of collegeAnswer: CDiff: 1 Page Ref: 27Question Status: Existing/Old

4) All of the following affect cash outflows exceptA) the size of the family.B) your age.C) your education level.D) your personal consumption behavior.Answer: CDiff: 2 Page Ref: 28Question Status: Existing/Old

5) If both a husband and wife are employed, their consumption behavior willA) increase.B) decrease.C) stay the same.D) None of the above; the employment of spouses is unrelated to consumption behavior.Answer: ADiff: 1 Page Ref: 28Question Status: Existing/Old

6) Cash flow can be increased by all of the following exceptA) increasing credit card purchases.B) working overtime.C) selling stock.D) getting a second job.Answer: ADiff: 1 Page Ref: 27Question Status: Existing/Old

2.3 Creating a Budget

True or False

1) A personal cash flow statement is usually the starting point for an individual's or family's budget.Answer: TRUEDiff: 2 Page Ref: 28Question Status: Existing/Old

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2) One advantage of budgeting several months in advance is that you will be warned of potential deficiencies and can determine how to cover them.Answer: TRUEDiff: 1 Page Ref: 30Question Status: Existing/Old

3) The most common error people make is to underestimate cash inflows and overestimate cash outflows.Answer: FALSEDiff: 3 Page Ref: 30Question Status: Existing/Old

4) Detecting future cash flow overages and deficiencies in cash inflows and outflows improves with practice in the budgeting process.Answer: TRUEDiff: 1 Page Ref: 30Question Status: Existing/Old

5) One of the problems in making a monthly budget is that some expenses fluctuate quite a bit from month to month.Answer: TRUEDiff: 1 Page Ref: 30-31Question Status: Existing/Old

6) A three-month budget is easier to prepare, anticipates large and unusual expenditures, and gives a better picture than a twelve-month budget.Answer: FALSEDiff: 2 Page Ref: 31Question Status: Existing/Old

7) Getting financial help from family and friends is easy and should be one of your first options in case of emergencies.Answer: FALSEDiff: 2 Page Ref: 34Question Status: Existing/Old

8) Careful budgeting and controlled spending lead to self-reliance and a feeling of financial freedom.Answer: TRUEDiff: 1 Page Ref: 34Question Status: Existing/Old

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Multiple Choice

1) Many individuals tend to ________ their cash inflows and ________ their outflows.A) underestimate; overestimateB) overestimate; underestimateC) minimize; maximizeD) not know; accurately knowAnswer: BDiff: 3 Page Ref: 30Question Status: Existing/Old

2) A budget will not do which of the following?A) Help determine if cash outflows will be sufficient to cover cash inflowsB) Anticipate cash shortagesC) Determine the excess you have to investD) Determine the additional payments you can make to reduce personal debtAnswer: ADiff: 2 Page Ref: 28-29Question Status: Existing/Old

3) If you do not budget for unexpected expenses in a given month, you will likely experience a(n)A) cash shortage.B) cash surplus.C) increase in assets.D) decrease in liabilities.Answer: ADiff: 1 Page Ref: 30Question Status: Existing/Old

4) In budgeting, it is useful to compare ________ with the budgeted amounts to determine the accuracy or error of the budget and adjust it as necessary.A) actual inflowsB) actual outflowsC) both actual inflows and outflowsD) current assetsAnswer: CDiff: 2 Page Ref: 30Question Status: Existing/Old

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5) If spending exceeds the amount of your income over a period of time, your best option is probably toA) reduce your spending.B) sell some of your assets.C) increase your work hours.D) get a second job.Answer: ADiff: 1 Page Ref: 30Question Status: Existing/Old

6) Which of the following is not an appropriate approach to solving the problem of an annual budget deficit?A) Liquidate enough savings or investments to make up the deficitB) Increase short-term, flexible expenditure itemsC) Renegotiate terms for long-term expense itemsD) Increase income by getting an additional part-time jobAnswer: BDiff: 2 Page Ref: 30Question Status: Existing/Old

Short Answer

1) A(n) ________ is a forecast of your future cash inflows and outflows.Answer: budgetPage Ref: 28Question Status: Existing/Old

Essay

1) Budgeting is a starting point for developing your financial plan. A good understanding of cash inflows and outflows, or what you make and spend is essential. Describe one way to increase your cash inflows and one way to decrease your personal outflows.Answer: Increase inflows through more income such as a pay increase or another job. To decrease outflows, cut expenses on a variety of personal expenditures. The answer is subjective and there are a variety of acceptable answers in addition to this basic one.Page Ref: 28-34Question Status: Existing/Old

2.4 Personal Balance Sheet

True or False

1) Stocks are considered liquid assets since they are easy to sell without a loss in value.Answer: FALSEDiff: 2 Page Ref: 35Question Status: Existing/Old

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2) Long-term liabilities are debts that will be paid at least three years into the future.Answer: FALSEDiff: 1 Page Ref: 36Question Status: Existing/Old

3) A high debt ratio indicates an excessive amount of debt and should be reduced over time to avoid any debt repayment problems.Answer: TRUEDiff: 2 Page Ref: 40Question Status: Existing/Old

Multiple Choice

1) Which one of the following is a liquid asset?A) Cash in a savings accountB) A swimming poolC) Real estateD) Stock held in an IRAAnswer: ADiff: 2 Page Ref: 35Question Status: Existing/Old

2) Liquid assets refers toA) the earnings on savings.B) the ease of converting a financial resource into cash without a loss in value.C) the amount of insurance coverage a person has.D) a person's inability to pay his or her debt.Answer: BDiff: 2 Page Ref: 35Question Status: Revised

3) Which of the following would increase your liquid assets?A) Buying a new carB) Making regular deposits to a savings account at your bankC) Buying rental propertyD) Putting more of your salary in a 401(k)Answer: BDiff: 1 Page Ref: 35Question Status: Existing/Old

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4) Which of the following is not a liquid asset?A) Cash in your pocketB) Money in a savings accountC) Corporate stock you own outrightD) Money in your checking accountAnswer: CDiff: 2 Page Ref: 36Question Status: Existing/Old

5) Which of the following is not considered an asset for a family?A) Cash in a checking accountB) A mortgaged homeC) A leased carD) FurnitureAnswer: CDiff: 2 Page Ref: 35-36Question Status: Existing/Old

6) Property such as a person's home, car, and furniture is calledA) liquid assets.B) household assets.C) major property assets.D) investment assets.Answer: BDiff: 1 Page Ref: 35Question Status: Existing/Old

7) Investment assets are all of the following exceptA) stocks.B) automobiles.C) bonds.D) rental property.Answer: BDiff: 1 Page Ref: 36Question Status: Existing/Old

8) When a person owns corporate stocks, government or corporate bonds, or mutual funds, these are calledA) liquid assets.B) household assets.C) investment assets.D) retirement assets.Answer: CDiff: 1 Page Ref: 36Question Status: Existing/Old

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9) Which of the following is not a true statement about mutual funds?A) They are managed by professional managersB) Proceeds are only invested in stocksC) Minimum investment is requiredD) The value of shares is reported in The Wall Street JournalAnswer: BDiff: 2 Page Ref: 36Question Status: Existing/Old

10) Balance sheet assets should be valued atA) original purchase price.B) replacement value.C) insured value.D) fair market value.Answer: DDiff: 2 Page Ref: 35Question Status: Existing/Old

11) Bills that are to be paid off within a year are calledA) short-term liabilities.B) one-year liabilities.C) current liabilities.D) insignificant bills.Answer: CDiff: 2 Page Ref: 36Question Status: Existing/Old

12) Liabilities can be calculated byA) adding assets plus net worth.B) subtracting net worth from assets.C) adding assets plus income.D) subtracting expenses from assets.Answer: BDiff: 3 Page Ref: 36Question Status: Existing/Old

13) Liabilities include all of the following exceptA) this year's monthly car payments on a three-year loan.B) the total mortgage on a home.C) the amount due on a credit card.D) the pay-off on a student loan.Answer: ADiff: 2 Page Ref: 36Question Status: Existing/Old

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14) Student loans, car loans, and housing loans are good examples ofA) long-term liabilities.B) current liabilities.C) short-term debts.D) personal obligations.Answer: ADiff: 1 Page Ref: 36Question Status: Existing/Old

15) The difference between assets and liabilities is calledA) surplus.B) deficit.C) net income.D) net worth.Answer: DDiff: 1 Page Ref: 36Question Status: Existing/Old

16) Another term for your wealth calculated by deducting money that you owe from the value of the things you own isA) gross income.B) net income.C) net property.D) net worth.Answer: DDiff: 1 Page Ref: 36Question Status: Existing/Old

17) A personal balance sheet presentsA) amounts budgeted for spending.B) income and expenses for a period of time.C) earnings on savings and investments.D) items owned and amounts owed.Answer: DDiff: 2 Page Ref: 34-35Question Status: Existing/Old

18) A personal balance sheet summarizesA) income and expenses.B) cash inflows and outflows.C) assets, net worth, and income.D) assets, liabilities, and net worth.Answer: DDiff: 2 Page Ref: 35Question Status: Existing/Old

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19) In the balance sheet, a(n) ________ in assets ________ net worth.A) increase; increasesB) decrease; increasesC) Both A and D are correct.D) decrease; decreasesAnswer: CDiff: 2 Page Ref: 36Question Status: Existing/Old

20) Jennifer has assets of $100,000 and $10,000 of debt. She couldA) borrow more money, since her debt ratio is low.B) apply for a bank loan, but expect to be turned down.C) borrow approximately $200,000 at below market rates.D) not borrow more money until she paid off her current debt.Answer: ADiff: 2 Page Ref: 40Question Status: Existing/Old

21) The current financial position of an individual or family is best presented with the use of aA) budget.B) cash flow statement.C) balance sheet.D) bank statement.Answer: CDiff: 2 Page Ref: 35Question Status: Existing/Old

22) Your current liquidity ratio is 2.0. If you take money out of your savings account to pay off a credit card your liquidity ratio willA) increase.B) decrease.C) stay the same.D) More data is needed to determine what affect this action will have.Answer: ADiff: 3 Page Ref: 40Question Status: Existing/Old

23) If you sell stock from your portfolio to pay off your car loan, your debt ratio of 0.5 willA) increase. B) decrease.C) stay the same.D) More data is needed to determine what affect this action will have.Answer: BDiff: 3 Page Ref: 40Question Status: Existing/Old

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24) Nancy has $40,000 of annual disposable income and saves $8,000 a year. Her savings rate isA) 5%.B) 12%.C) 17%.D) 20%.Answer: DDiff: 1 Page Ref: 40Question Status: Existing/Old

25) If you save the same dollar amount from each paycheck during your career as your income increases, your savings rate willA) increase.B) decrease.C) stay the same.D) More data is needed to determine what affect this action will have.Answer: BDiff: 2 Page Ref: 40Question Status: Existing/Old

26) If Jo Ann had $4,000 in liquid assets and $1,000 in current liabilities, she would have a liquidity ratio ofA) 0.25.B) 4.0.C) 1,000.D) 4,000.Answer: BDiff: 3 Page Ref: 40Question Status: Existing/Old

27) A low liquidity ratio meansA) that you have very few debts.B) that liquid assets are increasing faster than current debt.C) that you probably will have trouble paying your current bills.D) that you have many liquid assets.Answer: CDiff: 2 Page Ref: 40Question Status: Existing/Old

28) Paying cash for an Alaskan cruise wouldA) increase assets.B) decrease assets.C) increase net worth.D) decrease liabilities.Answer: BDiff: 1 Page Ref: 35Question Status: Existing/Old

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29) Paying off a credit card with cash will have the following effect on net worth.A) IncreaseB) DecreaseC) No effectD) Insufficient dataAnswer: CDiff: 2 Page Ref: 36Question Status: Existing/Old

30) Which of the following will not increase your liquidity ratio?A) Purchasing a stereo on creditB) Paying off a credit cardC) Selling stock for a gainD) More data neededAnswer: DDiff: 3 Page Ref: 40Question Status: Existing/Old

31) If your current debt to asset ratio is 50%, which of the following will increase it?A) Taking out a home equity loanB) Buying a car with cashC) Paying off a student loanD) Buying stock with cashAnswer: CDiff: 3 Page Ref: 40Question Status: Existing/Old

Short Answer

1) The cash in your wallet, your checking account balance, and your savings account comprise your ________ assets.Answer: liquidPage Ref: 35Question Status: Existing/Old

2) If your monthly disposable income equals $1,500 and you currently save $500/month, your savings rate is ________.Answer: 33%Page Ref: 40Question Status: Existing/Old

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Matching

Match the following:A) debt paid within a yearB) certificates representing partial ownership of a firmC) shares of a portfolio comprised of stocks and bondsD) certificates issued by borrowers to raise fundsE) financial assets that can be easily sold without a loss

1) liquid assetsQuestion Status: Existing/Old

2) bondsQuestion Status: Existing/Old

3) stocksQuestion Status: Existing/Old

4) mutual fundsQuestion Status: Revised

5) current liabilitiesQuestion Status: Existing/Old

Answers: 1) E 2) D 3) B 4) C 5) A

Essay

1) List three components of your personal balance sheet and two components of your income statement.Answer: The balance sheet includes assets, liabilities, and net worth. The income statement includes income and expenses.Page Ref: 35-36Question Status: Existing/Old

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2) Determine if the following are liquid assets or household assets by placing an L or H beside the following.________ Car________ Home________ Checking account________ Furniture________ Cash________ Savings accountAnswer: H CarH HomeL Checking accountH FurnitureL CashL Savings accountPage Ref: 35Question Status: Existing/Old

3) Judy has cash inflows of $3,000 for the month of June. Her expenses or cash outflows were $4,000. What is her net cash flow? List two options for Judy to meet her financial obligations in June. What is the effect (increase or decrease) of these options on her assets and liabilities?Answer: Net cash flow is a negative $1,000. Her options include taking money out of her investments (asset reduction) or borrowing money (increase liabilities).Page Ref: VariousQuestion Status: Existing/Old

4) Jerry has assets of $200,000, a net worth of $150,000, and an annual income of $100,000. What are Jerry's liabilities?(a) $100,000(b) $250,000(c) $50,000(d) $450,000Answer: (c) $200,000 - $150,000 = $50,000Page Ref: 36Question Status: Existing/Old

5) If you have current assets of $20,000 and current liabilities of $10,000, then you(a) have a current liquidity ratio of 2.(b) are in poor shape with a liquidity ratio of 0.5.(c) may have trouble paying your bills depending on their due dates.(d) are overextended by $10,000Answer: (a) $20,000/$10,000 = 2Page Ref: 40Question Status: Existing/Old

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6) A family with $45,000 in assets and $22,000 in liabilities would have a net worth of(a) $45,000.(b) $23,000.(c) $22,000.(d) $67,000.Answer: (b) $45,000 - $22,000 = $23,000Page Ref: 36Question Status: Existing/Old

7) David's liquidity ratio is 3.0. He has $1,000 in current liabilities. Therefore, he has ________ worth of liquid assets.(a) $3,000(b) $333(c) $4,000(d) $700Answer: (a) x/$1,000 = 3.0x = $3,000Page Ref: 40Question Status: Existing/Old

2.5 How Budgeting Fits Within Your Financial Plan

True or False

1) Your net worth can change even if your net cash flows are zero.Answer: TRUEDiff: 3 Page Ref: 41Question Status: Existing/Old

Multiple Choice

1) Which of the following actions will not increase your net worth?A) Country club dues paid monthlyB) Contributions to a mutual fund paid monthlyC) Car payments paid monthlyD) Home mortgage payments paid monthlyAnswer: ADiff: 3 Page Ref: 41Question Status: Existing/Old

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2) A person's net worth would increase as a result ofA) reducing amounts owed to others.B) reducing earnings.C) decreasing the value of assets.D) increasing spending on current living expenses.Answer: ADiff: 2 Page Ref: 41Question Status: Existing/Old

3) The net worth of an individual or family can be increased byA) increasing spending.B) increasing liabilities.C) decreasing assets.D) increasing income.Answer: DDiff: 1 Page Ref: 41Question Status: Existing/Old

4) The best measure of a person's or family's wealth isA) the amount of salary earned annually.B) net worth.C) the total dollar value of investment assets.D) the market value of real estate including the personal home.Answer: BDiff: 1 Page Ref: 41Question Status: Existing/Old

Short Answer

1) If your net cash inflows exceed your net cash outflows, you can increase your net worth by investing the difference in more ________.Answer: assetsPage Ref: 41Question Status: Existing/Old

Essay

1) If your cash outflows are $600 and your cash inflows are $1,000, you can increase your net worth by:(a) $1,000.(b) $600.(c) $1,600.(d) $400.Answer: (d) $1,000 ± $600 = $400Page Ref: 41Question Status: Existing/Old

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